I think that’s pretty typical yeah.
Things to consider:
—What is the practices’s overall collection rate, once write-offs are accounted for?
For example, I own a rural Midwest practice (funny coincidence), and our collection rate is typically 98-99%. So in a scenario Iike that, production vs collection doesn’t matter a whole heck of a lot—except for the delay on getting payment.
I mention write offs. Those come from the two insurances we do participate with. (BCBS and Delta premier.) Now, delta does account for 40% of our patients, but we’re premier so the write offs aren’t severe. It would be worth looking into what kind of insurance agreements you’d be working under.
My point is, if the practice has a good collection system and isn’t getting screwed by insurance write offs, it might not be worth dying on the hill of production vs collection. Especially if you’ll be transitioning to ownership in 12-18 months.
-Will you be the sole dentist there or working with the owner?
If the owner works there full time as well, you have to worry about how procedures and patients will be split to make sure you’re getting a fair mix of the high value and low value procedures. If this dentist, for example, owns multiple offices and won’t be there most of the time, this isn’t as big of a consideration.
-How much lab work does this practice do, and how are their fees compared to their lab bills?
Ask if you can see how much they charge for a crown and what the typical lab bill is. For us, the lab fee is around 18% of the crown fee (not including a core). But, I also have expanded duty RDAs so a crown only gets booked for 30 minutes of my time. Even if you subtract the lab fee and then calculate 35% it would be a very decent pay rate for the time.
Finally, I will say, the fact that this practice is rural is a huge plus for you. I love being in a rural area to work. I never have to advertise or compete for patients. There are never holes or gaps in my schedule because we can’t fill it. Most patients are geared to inherently trust you and your treatment recommendations, and you aren’t likely to lose them to a cheaper office or a corporate chain. They like settling into your office and staying there.
Anyway I wish you all the best and please feel free to message me if you like. Good luck!
Thanks for the insight. I'd love to chat sometime.
I'm going to avoid diving into specific details about the practice, but I assume you brought them up as things for me to consider, rather than for me to post on here. I have discussed a lot of this information with the owner, and I am waiting to get further information (fee schedules, insurance info, patient count, etc.).
We would be 50/50 partners. I'd assume he will work about 15 more years. I have already discussed this procedure split concern with him. A perk for this dilemma is that I hope to add several procedures that he doesn't do (molar extractions, molar endo, and implants). It is still a concern of mine, though. Great point.
The rural aspect is definitely a positive for me. I see corporate dentistry as a huge problem for the future of GPs in cities. Most dental students will be graduating with $300k+ in debt and corporate is pretty good at appealing to those. I'm sad to admit that the thought has crossed my mind with all the debt I will be in. Maybe we should just tax all you successful doctors at 80% so you can pay off the debt that I chose to put myself in
Just came across an offer as well that listed compensation of 30% adjusted production with all lab fees deducted (or $50 per CADCAM crown). My calculation leads to a take-home of about mid-20%s for lab procedures. I'm still new so this doesn't particularly sound like a great set up to me, but not terrible neither - would appreciate any insight you may have.
I came across a similar offer (with other things I disliked). I told the practice where their offer fell short and that I wouldn't be interested unless adjustments were made. Never would I have expected to do this to one of the first contracts I received, but you ultimately have to stick up for yourself. After all, we all have the choice to open up a practice across the street. We don't need to work for anyone. Especially if you're doing an associateship transitioning to ownership. You shouldn't feel like they're getting rich off you during the associate phase. You should feel like you're getting paid fairly and the owner(s) is/are getting an opportunity to make sure you are a great fit and will add value to the practice.
Just be aware that collections is hard to track and you'll be okay (you really need access to the full scope of the PMS, bank statements, and quickbooks to follow every dollar - and non partners don't get this type of access).
It's much easier to do this instead - owner wants you to be paid 35% of collections - great, I'll take 32% of adjusted production (that assumes the practice is collecting 97% + and the owner is incentivized to collect payments and you can predict your earnings with simple day sheets).
You don't want to pay 50% of the lab fee with 35% collections. 35% collections, you pay 35% of the lab fee. At 50%, an example - Emax crown costs $160 from the lab (standard, not layered) + shipping in some cases. Your adjusted production for the crown without a build up is 900 and your office collects 97% on average, so your collections for the crown are $873. At 35% of collections you get paid $305.55 per crown before paying the lab bill which at 50% will cost you $80 per Emax crown for an decent lab (not the best, not the worst). $305.55 - $80 = $225.55 per porcelain crown. That's okay but not great and assumes you'll be getting at least $900/crown which may not be the case. I've done crowns for $400, so if you get paid $400 x .35 = $140, subtract the lab bill of 80 and you're left with $60 for your crown...that sucks (you'd have to switch labs in this case, probably monolithic zirconia crowns, about $99/each from a big box lab suitable for posterior crowns only).
How rural is this practice and what's the overhead? What are the fee schedules like?
To your first point, I would agree if it wasn't an associateship transitioning to ownership. I would never consider having that setup if the owner kept the books private. If the associate is going to be an owner, he/she should have access to any financial information he/she wants. I would never consider buying into a practice if this wasn't true. While I disagree with the premise of that first sentence (not getting access), it does make sense to want to avoid that. After all, I am choosing to start as an associate so I can focus more of year one on increasing speed and taking CE.
I don't know that the math checks out on your second point. 32% of adjusted production of $1M is $320k. Collecting 97% of that same $1M ($970k), and earning 35% of that leads to $339,500. In that case, collections wins significantly. (Disclaimer: 1M was used for simplicity. I do not expect to produce 1M in year one. Though that would be nice..)
I like your point on lab fees. Currently, both offers I have want me to pay 100% of the lab fee. I find that bizarre.
The practice is rural, but not reservation rural. I would say the population draw (30 mile radius) is a little over 20,000 and there are 6 dentists in the area. The overhead/fee schedules are things I'm waiting on.
Thanks again for your input! Much appreciated.
A few things to consider.
1. If you're goal is ownership ... then an EXACT time of associateship leading to partnership/buyout needs to be determined (Letter of intent). I would never go into an associateship with this uncertainty. You will be wasting your time. That time should be around 6-18 months. The owner has to be committed to this arrangement. If that person is not ..... and your goal is ownership .... then you are wasting your time.
2. If owner is onboard with partnership/ownership .... then a legal doc designating this TIME schedule needs to be available. This period is a due diligence period. The doc should designate you to have 1st right of refusal on the partnership/buyout. You should have access to all practice financials during this period. At this time .... you should find a dental specific acct/practice transition expert to assist you in these negotiations.
3. If you and the owner are serious about this ..... then the associateship compensation details are not that important. They should be fair .... but the goal is partnership/ownership in a pre-determined time.
4. Do not involve an attorney in the negotiations unless they are part of the practice transition team. No one likes attorneys. An attorney is needed for the letter of intent and then the actual partnership/sale of practice docs. THAT'S IT. They are not needed for negotiations between you and the owner. A heavy handed attorney can ruin a transition.
I say this from experience. My 1st associateship leading to buyout ended badly. After a due diligence period .... my acct and I did not believe the ortho practice was worth what the seller wanted. I was essentially fired when the owner did not want to negotiate further. 6 months later .... I successfully negotiated a partnership leading to buyout in 18 months with another older orthodontist.
Thanks for your advice! All great points.
1. Noted. The contract would state that I can buy 50% after 12 months. We may do a production quota for both sides (i.e if he's only producing 25% in 15 years, I could tell him it's time to retire).
2. This seems to be how it is currently structured. I will look into a dental specific accountant or practice transition expert. Any recommendations?
3. I agree. He doesn't want to make money off of me, but it's also important that he doesn't lose money. We should both enter both phases feeling good. For me, I think it comes down to feeling wanted during the associateship, a fair buy-in price, and me wanting to make the area my forever home.
4. I wouldn't consider talking to an attorney until right before I was ready to sign. I trust myself in negotiations more than I trust an attorney, and I don't have to pay myself haha.
This dentist also had a bad previous experience regarding ownership, so he will be sure to be thorough. I think he trusts that I will continue his legacy with the practice he built, and I trust him to be a good mentor.
But you get paid a smaller % if production based... Why would you take this vs a higher percentage with compensation based ?
This is pretty simple... What you produce isn't what you collect. 2 scenarios for you. Both are the same job. Which would you rather have?
A) 33% of adjusted gross production at $455,000
OR
B) 35% of collections at $415,000
The argument here is that you could be great at your job and your employer could be horrible at collecting payments. As an associate, it's not your job to worry about your patients paying. I think this becomes a different story if you're an associate looking to own, which is the crux of the situation I'm in. In the above scenario, a 91-92% collections rate that is out of your control as an associate costs you $5k.
